What is Brexit?

The UK held a referendum in 2016 to leave the European Union (EU). As part of the departure process in 2018 the UK government triggered a mechanism called Article 50 which meant the UK would leave the EU after two years. This created a ‘transition period’ – designed to give enough time for the UK to negotiate a trade relationship with the EU.

The UK formally left the EU on 1st Feb 2020. However, it still remains within the EU customs territory and Single Market until the end of the Brexit transition period on 31 December 2020.

The full impact Brexit will have on aircraft flying into or within the EU and UK from a tax and customs perspective remains largely unknown. One thing to be sure of is that from 1st January 2021, there will be two separate customs territories, the UK and the remaining 27 member states (the EU 27). The free movement of goods, services, people and capital currently enjoyed will be a thing of the past and a hard border will be in place between the UK and EU.

Having two separate customs territories between the UK and EU compromises the existing free circulation status of aircraft imported into EU via the UK if there is no last minute trade deal. In other words, if an aircraft has been imported into the EU from the UK, in 2021 it will no longer be in free circulation in the EU27 unless a deal is done at this late stage. This division of customs territory means that all aircraft will be impacted in one way or another. Business aircraft owners will need to have solutions in place for the UK and/or the EU – depending on the operation of the aircraft in question.

So, what are the solutions and how should aircraft owners, operators and users react?

Deal or no deal: are we close to a decision?

The UK and United Stated of America have agreed a bilateral Air Services Agreement which means that commercial air transport between the UK and US will continue as before. A similar agreement has also been signed with Canada. We still know very little of the negotiations between the UK government and the EU, and time is very much of the essence. If there is to be a trade agreement with the EU it needs to be concluded very soon in order to allow time for it to be ratified by the 27 member states of the EU as well as the UK parliament.

What is VAT and how is it calculated?

VAT (value added tax) is a tax on transactions. VAT is typically levied at import to any Customs territory where VAT applies. If a North American registered aircraft will fly into the EU in order to be used there the aircraft will need to be imported – and VAT paid at import – unless the aircraft can be brought in under the Temporary Admission (TA) relief regime.

The VAT calculation itself is based on the VAT rate in the member state of arrival, which currently varies from 17%-27% depending on the member state. VAT is applied according to the rules  set out in the Union Customs Code together with each member states’ national VAT laws and are calculated based on the declared value of the asset. There are specific rules that govern how this declared value is calculated. For example this could be based on the value of any recent sale or purchase, prior to import.

Why does this impact aircraft, aircraft owners and aircraft operators outside of the EU and UK?

If an existing EU imported aircraft flies into or within the current EU territory it will be affected by Brexit. As EU Customs territory will be split into two separate Customs territories in the future, i.e. the UK and EU, aircraft could remain imported in one or the other but not both. With no agreement in place, there is no reason to assume that the status of the aircraft will remain imported into both the UK and the EU, known as “grandfathering”.

What about aircraft imported under the old weight based regime via the UK before 2011? Will they be impacted by Brexit?

All aircraft will be impacted in one way or another. If the aircraft has not been formally exported or sold outside the EU then it will not lose this import status but, if there is no deal, the aircraft will only be considered to have been imported into the UK and will no longer have free circulation in the EU. Therefore owners or operators of aircraft imported prior to 2011 will either need to arrange a full importation or investigate whether TA could be used for travel inside the EU in future.

It is also important to check when the aircraft was last in the EU or the UK, because if that was more than three years ago the aircraft may have lost its right to Returned Goods Relief (RGR).

Getting prepared; what to look for and what to check to determine whether or not you need to take action?

Aircraft owners need to analyse their present situation and review the use and operation of their aircraft. This is going to first require all business aircraft owners to find and review the relevant paperwork to support the current importation status of the aircraft.

It may also be necessary to contact the original team who dealt with the importation of the aircraft. The aircraft manager/operator, tax advisor and the legal counsel will need to pull out the paperwork and see how each dealt with the importation at that time. The questions to be asked at this stage will primarily be:

• Has anything changed with respect the aircraft status or ownership?
• Why was the aircraft ownership and registration structured in a particular way?
• Has the owner’s situation changed (retired; bought new property in UK/EU; new business interests in UK/EU etc.)?

Are there any specific documents that aircraft owners or operators should be looking for?

The import evidence for the majority of aircraft imported will be a “Single Administrative Document” or a “SAD”. In Italy and Spain this would be referred to as a “DUA”, and in the UK the form is known as a “C88”. This might be kept on board the aircraft, or in the lawyer’s office. To the average person this may not look like much but to the tax advisor or a customs officer it provides a lot of information about how the aircraft was imported, who imported it and how the VAT has been accounted for.

What options will be available to aircraft owners and operators?

Martyn Fiddler Aviation recommend what we consider to be the three optimal solutions to permit business aircraft to continue to have access to the EU and/or the UK after 31 December 2020.

These three options are:

1. Temporary Admission (TA)
2. Full import to UK or EU via the “Netherlands Navigator”
3. A new corporate ownership structure

Temporary Admission

Temporary Admission (TA) is a great tool for private business and private pleasure aircraft users as occasional visitors to a customs territory (i.e. those making ad-hoc flights). As the name suggests, TA allows temporary customs relief from import VAT and duty (if applicable) so business aircraft can be admitted into a customs territory.

TA is a suitable solution for private users, private families, and private business users providing the following three main requirements are met:

• The aircraft is registered outside the territory being visited;
• The aircraft is owned outside of the territory being visited; and
• The user of the aircraft needs to be resident or established outside of the territory being visited.

Note, there are other conditions that must be met, but these are the primary requirements.

Advantages of Temporary Admission

• TA is an alternative to a full import for aircraft. Under TA all normal import taxes (VAT & Duty) are relieved.
• TA is what is known as a simplified procedure – i.e. designed to be quick and easy for aircraft owners with little paperwork required. Martyn Fiddler Aviation advise that if an aircraft will travel between areas in a territory, for example between France and Spain inside the EU then TA should be formalised with the requisite paperwork which can be done on arrival.
• TA is a free Customs relief and applies as soon as an aircraft crosses the border into the customs territory and lasts until it is discharged or closed.
• After 31 December 2020, TA may provide opportunities for aircraft which could not previously use it i.e. aircraft owners might be able to use TA in the UK or the EU – and vice versa.

Disadvantages of Temporary Admission

• Aircraft owners must meet the three main requirements for TA (outlined above).
• The user of the aircraft must be from outside the customs territory. This could be a company established outside the customs territory or an individual who is resident outside. However, there is no specific customs definition for the term ‘residence’ which means the interpretation may vary between the EU27 member states. Things that might be taken into account are the user’s passport, tax residency, family or business links, frequency of visits etc. Again, the user will need to consider that if they stay in the customs territory for too long, the application for TA may be rejected.
• TA is limited to a maximum of 6 months duration.
• There are various other conditions for example the aircraft cannot be used commercially, for charter, sale and there is a restriction on what works may be done to the aircraft etc.
• If the TA requirements are breached, the tax authority are able to retrospectively impose an import status on the aircraft. This also means the tax authorities can retrospectively impose import VAT on the value of the aircraft which may not be recoverable at that stage.

The Netherlands Navigator

The Netherlands Navigator offers a one off importation route through the Netherlands. This has been in place since 2014 and is used by aircraft owners worldwide to import aircraft to the EU.

Martyn Fiddler Aviation have fiscal licenses in the Netherlands which allow MFA to stand in the shoes of a client as their tax representative. These licenses enable MFA to import the aircraft and also to reclaim the VAT on that importation on behalf of a business aircraft client.

This solution is suitable primarily for corporate clients, charter companies and AOC’s. Martyn Fiddler Aviation have represented over a hundred different corporations around the world including the US, Australia and Russia using the Netherlands Navigator solution. As long as those companies are supplying “taxable” goods or services, then Martyn Fiddler Aviation can represent them in the Netherlands.

The Netherlands Navigator offers a seamless import solution as there are no additional requirements for records or data outside of those required for normal aircraft operations after the import.

Advantages of the Netherlands Navigator

• From a tax perspective, once the aircraft is imported using the Netherlands Navigator solution, the aircraft owner has free EU circulation and is accepted in all of the EU 27 member states.
• The Netherlands Navigator solution provides certainty of use compared to TA.
• As the import VAT is paid by way of deferment and reclaimed via the fiscal representative’s records, this provides a significant cash flow benefit.

Disadvantages of the Netherlands Navigator

There are few disadvantages to the Netherlands Navigator solution. One point to note is that if there were any subsequent changes to the use to the aircraft the suitability of this solution may need to be reconsidered.

Corporate solutions

A corporate vehicle is useful for people and organisations that have their headquarters outside of the EU but have business operations within the EU, and whose aircraft is going to be based in the EU or UK.

In practice, the company formed to own the aircraft would make the aircraft available to the rest of the companies in the group through a dry lease. The company will raise invoices and receive payment, and will be a genuine trading company that leases out its aircraft for its business. This allows the company to reclaim the VAT charged at import, provided these arrangements comply with local VAT rules.

Different member states have different ways of dealing with VAT. The most common is to pay the import VAT at import and reclaim the VAT via the periodic VAT returns. This is detrimental to cash flow efficiency on a high value asset like an aircraft. A few countries will allow VAT deferral until a point in time in the future, and a few more permit recovery to off-set the import VAT payment, meaning providing for a significant cash flow benefit.

Advantages of a corporate vehicle

• Potentially no need to pay the import VAT upfront with the right corporate structure
• Ability to reclaim the VAT on bills received where VAT has been applied under the local rules

Disadvantages of a corporate vehicle

As for any company, owners take on the commitment of running the company along with enjoying the benefits that come with having it.

Considering the option of a corporate solution compared to using the Netherlands Navigator

Any comparison will depend on what is required for the aircraft operation e.g. where it is flown and how it is used etc. A corporate solution may be the right choice where there are a lot of costs or VAT incurred within the EU.  Otherwise, if the requirement is simply to import the aircraft and reclaim the VAT in order to access free circulation to the EU free circulation, then the Netherlands Navigator is the right answer. Remember that no one size fits all – review your own situation to find the optimal solution.

Why bother with a full importation when TA is free and easy?

The core requirements to use TA must be met, i.e. that:

• The aircraft is registered outside the territory being visited
• The aircraft is owned outside of the territory being visited
• The user of the aircraft is resident or established outside of the territory being visited.
• There are multiple factors to consider, for example if the aircraft is carrying EU passengers within the EU, they could be seen as the users, this might breach the TA rules and therefore the aircraft would need to be imported.

TA is – by definition – ‘temporary’. Abusing TA could mean facing EU customs imposing a retrospective import on the aircraft – in other words, severe financial consequences.

Facing twenty seven different interpretations of what might constitute a non-EU “user” can be challenging and does not provide certainty.

Some owners simply prefer to import for peace of mind to avoid rules being broken.

Are some forms of TA more secure than others?

TA is defined in the law of the customs code, there are no different forms or versions. If a business aircraft does not meet the requirements within the set rules, then TA cannot be used.

What about aircraft that are being sold for use in either the new EU27 or the UK?

One of the things that brokers and lawyers often look to achieve is to close a transaction in a non – EU territory, this is so they can be sure that the seller will not need to charge EU VAT and that the buyer won’t have an EU VAT liability risk. Often aircraft will go to the Channel Islands – and in particular Guernsey – to facilitate this. However, there are limited maintenance or technical facilities on the Channel Islands, so if the aircraft had a technical fault on the ground, there may not be sufficient technical support to assist.

In a post Brexit world, a new option would be to close in the UK, as this will now be a third country to the EU. The transaction would be outside of the EU customs and VAT territory. For removing the risk of UK VAT on the sale it is possible to use the network of customs warehouses that Martyn Fiddler Aviation operate in the UK. These allow non UK imported aircraft to enter the UK without having to import the aircraft and pay import VAT. Brexit will make the UK a safe haven for such aircraft transactions without further VAT consequences.

How do you start to narrow down the options?

Martyn Fiddler Aviation would always advise that business aircraft owners seek professional and impartial advice. This will help find the optimal solution, will ensure risk is limited, that the solution is legal and that it has longevity.

Martyn Fiddler Aviation’s message is “don’t overcomplicate the solution keep it simple and match reality”. Build the tax issue around the circumstances rather than have tax situation lead the way. Being swayed by a solution with a quicker lead time will only lead to risk of problems later down the line. Plan now, review the use and operation of the aircraft, seek advice and be ready to put a plan into motion as early as possible.

Is it essential to engage a tax advisor?

Aircrafts are very valuable assets and if owners make the wrong decision, this can result in a very expensive tax bill. From experience we would say that tax advice is not a “nice to have” but a must have!

Do I need to worry because I have an N reg?

The registration mark does not denote the operation or even where the aircraft is based. Martyn Fiddler Aviation have handled numerous N reg aircraft over the years that have UK or EU operational needs and therefore require a full import, or a corporate structure in Europe.

Myth busting

Can I deal with it now or do I have I have to wait until January 2021?

There is no choice while the UK remains in the customs territory of the EU. There is nothing that can actually be finalised until January, but that doesn’t mean that you shouldn’t be planning what to do when the time comes, seeking professional advice and preparing for the steps you need to take now.

What is “grandfathering”?

What is described as “grandfathering” is the situation where the UK and EU governments can agree to allow existing EU free circulation aircraft to remain in free circulation in both the EU27 and UK after the transition period.

I have been told that everything will be grandfathered so I don’t need to take action?

During the Brexit negotiations there has been hope that both governments would reach an agreement on grandfathering for aircraft as a special consideration.  However this is now a fading hope, and even if grandfathering were approved it would likely only to be for a period of time and with conditions. There has been no further indication that this is likely and so Martyn Fiddler Aviation advises business aircraft owners to seek professional advice and not to bank on any kind of grandfathering being permitted.

Summary

1. Brexit is an issue to be resolved for all aircraft entering into or flying within both the EU and the UK2.
2. There are options to resolve the Brexit issue and your aircraft team will need to check the facts and import documents first to identify the aircraft’s needs and  the optimal solution
3. Brexit presents opportunities for aircraft owners, however our advice to hope for the best and prepare for the worst